Chapter 26: The “Prosperity” of Wartime
Summary
The economic woes experienced between 1929 and 1939 were soon forgotten. As early as 1940 the
private economy started to gain steam. At the same time, World War II (WWII) started and the U.S.
eventually entered into it. Government expenditures, utilizing deficit spending, appeared to eradicate
many of the problems of the depression era. But this deficit spending placed inflationary pressures on
the country. Physical rationing and other controls were used by the government to dampen private
spending and investment. Thus, deficit spending of WWII required private sacrifices. Nonetheless, the
direct belief of many was that government had the power to control aggregate demand and promote
full-employment inside the U.S. economy. Keynesian theory was alive and well during this period of U.S.
history! This “evidence” and the support of Congress led to the passing of the Employment Act of 1946,
which impacts us today by giving the federal government official responsibility in managing fullemployment efforts in the U.S. through fiscal policy. This chapter tells the story of wartime “prosperity”
and highlights how the experiences of this period impact us today.
Key Terms and Concepts
Bonds
Command economy
Deficit spending
Keynesian views
Engel’s law
Money supply
Price controls
Taxes
Teaching Tips
1. Looking at the U.S. economy during the World War II (WWII) period, highlight its command
economy features. Discuss its advantages and disadvantages.
2. Explain why some economists like Robert Higgs point out the negative aspects of the increase in
WWII government expenditures. (The resulting negative net private investment, rationing of
consumer goods and services, price controls, etc. hindered economic growth. Higgs holds that
increases in financial wealth and optimism were responsible for economic progress.)
3. Ask students to explain what happened to unemployment during WWII using statistics. Explain
the mobilization of resources here. Discuss how the demand for military services helped reduce
racism and gender and age discrimination.
4. Discuss the various ways in which a war can be financed. Compare how WWII was financed to
the financing of the U.S. Global War on Terrorism. Discuss the economic implications of the
differences.
5. Between 1941 and 1944 real GDP per capita increased by 44 percent. At the same time,
unemployment fell considerably. Discuss the impact of these changes in the financial positions
of the rich and poor; private consumption and investment; income distribution and future
expectations.
6. Using the discussions centered on this chapter, discuss the events leading up to the Employment
Act of 1946. Ask students to explain how this act continues to impact us today.
7. Ask students to explain why price controls were used to curb inflation during WWII. Have
students read Rockoff’s "Price Controls" to explain why economists are frequently against their
use.
Websites and Additional Resources

Rockoff, Hugh. "Price Controls." The Concise Encyclopedia of Economics. 2008. Library of
Economics and Liberty. Retrieved December 11, 2009 from:
http://www.econlib.org/library/Enc/PriceControls.html